“Full Pension Reform” In Long Beach Leaves $700 Million Unfunded Liability

The city of Long Beach, California has tried harder than most California municipalities to reign in rising pension costs and reducing its unfunded liabilities. Considering that this is California, though, that really isn’t saying much. Long Beach is in the process of wrapping up a two-year long process of negotiating pension reforms with all bargaining units in the city. The reforms prompted Mayor Bob Foster to announce that “Long Beach has achieved full pension reform with lower and more sustainable benefits for new employees and full employee participation for all employees.” The reality is far less cheerful and the reforms too little, too late.

First, a brief introduction to the mess that Long Beach got itself into. Long Beach city employees are enrolled in the statewide California Public Employees’ Retirement System (CalPERS). CalPERS sets contribution rates that employers (government agencies, aka taxpayers) and employees are supposed to make towards CalPERS in order to fund the program. Long Beach, like states and municipalities across the country, has had a tendency to promise far more than it was actually willing to pay. Consequently, Long Beach has been making $1.1 billion more in pension promises than it has actually contributed towards CalPERS.

Long Beach should have seen this coming, and probably did. In 2010, it was reported that 1 in 5 Long Beach employees (574 employees) were earning over $90,000 per year in base salary. As of August 2012, the total number of Long Beach employees earning over $100,000 per year grew to 862. In a city with an unemployment rate of 11.9%, public employees are living large. In fact, Long Beach city employees retire in the $100k club at twice the state average, with nearly 7% of retired Long Beach city employees receiving pensions in excess of $100,000.

In this context, Long Beach rightfully decided to reform how it promises and paid for pension benefits. The reforms it has taken are generally exemplified with reforms it made with the City’s Management Association, Confidential Employees, Attorney’s Association, and the Prosecutors Association.

The city summarized the reforms as follows:

• New employees will pay the full 8% of their salaries for their pension costs, increasing from the current level of 2%.
• New employees will retire with a benefit formula of 2% for each year worked, as opposed to the current formula of 2.5%.
  
• New employees will be eligible for full retirement at age 60 rather than the current age of 55.
  
• Employees final compensation will be based on a three-year average of their salary, not the year in which they earned the most.

While these reforms are welcome, they provide insight into how flawed the city did business before these reforms. Even more, the first three of these reforms are tied to “new employees,” meaning that actual savings from them won’t really be realized for decades to come.

The first reform effectively ends the practice called “pension pickups,” officially known as an “Employer Paid Member Contribution” in CalPERS-speak. For years, taxpayers footed the bill for the employer contributions towards CalPERS in addition to making up for the 6% gap between contributions employees were supposed to be making (8%) and what they were allowed to contribute by the city (2%). This can hardly be considered a reform and is effectively just having employees pay for what they were supposed to be paying for all along.

The second and third reforms, a reduced benefit factor and higher retirement ages, will only apply to new hires. In other words, they do nothing to cut the costs of the many employees who will be retiring up to a decade before the rest of us (at 55), with a more generous than is sustainable pension benefit. Primarily, this is because reforms to current employees are limited by contractual limitations on reforms. Unfortunately for taxpayers, defined benefit pension systems tie the hands of taxpayers and policy makers tomorrow from being able to fully reign in the mistakes of today.

The final reform may save tax dollars by mitigating any “pension spiking.” Pension spiking is the practice of boosting ones pensionable compensation in the final years of work in order to receive a higher pension than one otherwise would. Fortunately, CalPERS has done a reasonable job of restricting the practice, which often takes the form of employees working excessive overtime in the final year of employment or retiring soon after a pay increase or promotion. By expanding the pensionable period from one year to three, the potential for suddenly spiked pensions are mitigated by considering a longer period of earnings.

All told, these reforms are estimated to reduce the unfunded liability from $1.1 billion to $700 million. Like every positive development in government, there is a catch to all these reforms. The last four bargaining units to officially ratify the agreements–engineers, confidential employees, managers, and lifeguards–agreed to a deal that is estimated to cost taxpayers $83 million over 10 years. How? While agreeing to pay their full 8% contribution, up from 2%, the city offered employees a 6% pay increase to cover the cost of these contributions. In addition, these employees will receive a 5% salary increase in the first year of the contract, and an additional 4% salary increase in the second year of the contract. In other words, in exchange for paying their full contribution rate, these employees will be receiving a 15% salary increase. As a result, much of general fund savings from the reduced unfunded liability are eliminated by higher salaries. This generally how the city achieved “full pension reform” with all of its bargaining units, with pay increases to offset the additional “employee contributions” with salary increases.

This has generally been the approach of “pension reform” across California. Ventura County, for example, similarly offered salary increases to offset employees making their full pension contributions, in addition to general salary increases probably exceeding anything private sector employees will be seeing anytime soon. Unlike Long Beach, Ventura County went a step further and even gave employees represented by the Service Employees International Union and International Union of Operating Engineers a lump sum payment of $750 upon approval of their contract. Santa Barbara took a similar approach in negotiations with city police, offering salary increases offsetting the contribution increase in addition to general salary increases.

In any case, these “pension reforms” are only delaying more substantive pension reforms and giving policy makers a false sense of security when it comes to tackling their unfunded pension liabilities. Meanwhile, taxpayers continue to bear the brunt of “reforms” that come at high cost to them without any reason to believe that their best interests are being represented.